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Negative rates and digitization: Banks must reinvent themselves

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The Euro Stoxx Banks sector market index has lost 40% of its value since the start of the European recovery in 2014, while the Euro Stoxx global index (all sectors combined), has gained 20%. This divergence reflects the major challenges facing European banks. The environment of negative interest rates and the advent of new business models related to digitization are the two main ones.

Negative interest rates are spreading across Europe under the impetus of the ECB (European Central Bank): the deposit facility rate (at which banks' excess reserves with the ECB are remunerated) has been below 0% since June 2014; the Euribor rate (the short-term money rent between banks) has been since April 2015; the rate of 10-year German sovereign bonds had become temporary in the summer of 2016 and has been since March 2019.

With the end of the macroeconomic cycle that began in Europe, these negative rates seem to be long-lasting. However, a low interest rate environment squeezes retail bank margins, as asset returns are negatively affected while the cost of liabilities (mainly bank deposits) remains stable.

Some banks already charge the deposits of the largest depositors, but they refrain from them vis-à-vis individual depositors. Indeed, the latter could then prefer to keep their money in cash, outside the banking circuit. So far, the ECB, and its president Mario Draghi in particular, have objected to protests by European banks that lower unit margins would be offset by higher trading volumes, facilitated by ultra-sound monetary policy. accommodative.

Problem, with the slowdown in growth taking place in Europe, the rise in credit is sinking sharply: + 2.2% over one year in August against a peak of + 5.0% in early 2017. Therefore, the ECB recently put in place specific measures to support banks (new long-term financing TLTRO III, exemption from negative rates on part of the reserves).

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The risk is, however, to create a lasting dependence of banks on such infusion measures. It is even more present that the European banks face in parallel a challenge to their traditional business model, which is just beginning. The development of digital technologies has initially benefited banks, allowing them large-scale economies in the management of their operations.

Increasingly, however, banks are facing the emergence of fintechs representing asymmetrical competitors. This situation gives rise to partnership or buy-back policies (as well as the absorption of the Compte-Nickel, intended for a student audience by BNP Paribas a year ago).

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On the other hand, there are more formidable actors: the Gafam. Apple Pay is already growing. The upcoming launch of the Libra cryptocurrency by Facebook shows the growing appetite of digital giants for the financial sphere. In this context, the evolution of the European regulation will play a critical role: if it became permissive with respect to the exploitation and merchandising of depositors' banking information, the digital players would probably have a boulevard in front of them. Traditional banks will try to reverse the protection of banking information, which they have been offering credibly for decades.

* Gafam: Google, Apple, Facebook, Amazon and Microsoft

This article is in the contents of the new Capital in Newsstand and in digital.

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